Market overview

Markets are sending a mixed signal. Equities remain well bid, with strong earnings keeping sentiment buoyant and the S&P 500 more than 3% higher on the week. FX, however, looks less energetic. The dollar has firmed modestly, limiting follow-through in major peers such as the euro and sterling.

The broader de-escalation trade is still intact, but investors now want firmer evidence before extending it. Concerns around the Strait of Hormuz remain a key constraint, preventing a cleaner reversal of the conflict-driven positioning built up since March.

USD: Dollar downside needs a clearer trigger

The DXY remains supported above the 98 level, with markets waiting for a fresh catalyst. Reports suggest the US and Iran are considering extending their ceasefire, due to expire on Tuesday, by another two weeks to allow more room for talks, while Pakistan continues to play a mediation role.

President Trump has sounded increasingly confident that an agreement with Iran can be reached, although Tehran has offered little public encouragement so far. Separately, the Israel-Lebanon 10-day ceasefire has added to the de-escalation narrative, although that theme is starting to look well worn.

A formal extension of the US-Iran ceasefire should limit dollar upside, but it may already be partly reflected in pricing. A sustained move below 98 in DXY would more likely require the Strait of Hormuz to reopen, easing oil prices and reducing residual haven demand.

GBP: Sterling supported, but 1.36 remains a test

Sterling gained little from the stronger monthly GDP print, with investors still wary that the conflict could weigh on the UK outlook. UK front-end yields have fallen around 10bp this week as markets unwind some of the earlier hawkish repricing linked to inflation risks.

Bank of England Governor Andrew Bailey said on Tuesday at the IMF that there is not yet meaningful evidence to justify a rate rise, helping to calm short-end rates. Even so, GBP-USD OIS spreads remain the most favourable for sterling since 2023, leaving GBP/USD reasonably well underpinned.

Cable is holding just below 1.36 as the wider risk rally loses momentum. A clearer de-escalation signal could still trigger another push higher, but next Tuesday’s UK labour market data may limit conviction, especially if it supports further cooling in rate expectations.

EUR: Euro resilience still lacks conviction

EUR/USD has slipped after an eight-day winning run, but it remains on course for a third straight weekly gain and is more than 3% above its conflict-led March low near 1.14. The technical picture remains constructive, with the pair trading above key daily and weekly moving averages.

Still, upside momentum has slowed. EUR/USD continues to find the 1.18 to 1.19 region difficult to clear and has not closed above 1.20 since 2022. The message is clear: the euro has recovered, but this has been driven more by a fading dollar war premium than by a decisive improvement in eurozone fundamentals.

For a cleaner break higher, markets need stronger confirmation that tensions are genuinely easing, particularly progress on the Strait of Hormuz. A durable move above 1.20 is possible, but only if the conflict remains contained and energy risks continue to recede.

Looking ahead

• US-Iran ceasefire extension headlines remain the near-term focus.
• Any progress on reopening the Strait of Hormuz would be a stronger dollar-negative catalyst.
• UK labour market data next Tuesday will be key for sterling and BoE pricing.
• EUR/USD needs clearer de-escalation evidence to challenge 1.20 sustainably.
• Oil prices remain central to the next leg in FX risk appetite.